Crude Oil is Knocking on the Door of a Breakout Nobody Expected to Happen

Posted by jbrumley on November 2, 2017 5:23 PM
110217-crude-oil-daily-chart

A week ago we pointed out how crude oil had pushed its way past a pretty significant technical hurdle, and though the rhetoric and outlooks all pretty much said the rally wasn't built to last, crude prices are up another 1.6% since then. That's not a massive move, but in light of the fact that oil prices ended Thursday's action on a bullish foot and are about to test the next big hurdle (and arguably the last big hurdle for a while), it's already worth revisiting.

The chart of crude oil prices below is what it is. Oil brushed the January peak of $55.24 on Wednesday, and though the stock peeled back on cue, the setback has already been slowed; crude prices were up again on Thursday, ready to test $55.24 again.

110217-crude-oil-daily-chart

Almost needless to say, the way in which crude prices have resiliently held their ground has caught many  by surprise.

Zooming out to a weekly chart of crude oil puts it all in perspective. After forming a head-and-shoulders buy signal over the course of the past three years, oil is on the verge of a new multi-year high. And, with the past four years in view on the weekly chart we can see there's no prior peak above the $55.40 until the $62 area, where crude prices toyed with a recovery in 2015 but ultimately hit a ceiling before reaching their ultimate bottom. Past that, there's nothing to hold a rally back. Even a move to $62, however, would be a pleasant surprise.

110217-crude-oil-weekly-chart

The most noteworthy reality of this budding breakout is, as was noted above and last week, it -- according to the rhetoric and the pros anyway -- it shouldn't be happening. It's that mentality, however, that veteran traders know may well be fanning the bullish flames. The market has a knack for doing what most traders think it shouldn't or can't do.

And perhaps that's an indirect way of saying something more directly.... crude oil could romp back up to well above $80 per barrel not despite doubts that it will do so, but because of those doubts.

It won't get there overnight, of course, and not even in a matter of weeks. It's also unlikely it will get there in a straight line. Indeed, it would be surprising if oil didn't slide lower a couple of times in the near future, perhaps without even clearing the hurdle at $55.24 first. Oil prices have been a little too bullishly resilient to dismiss the possibility now, though.

See, there's nothing more self-leveling than time when money is at stake. The supply/demand balance will eventually take shape at prices that drive acceptable profit levels. The energy sector is back to profitability again, but not impressively so. Capital will flow to these companies -- and interest in oil stocks rather than other stocks -- will normalize at better profitability for oil names, and it's going to take prices in the $80's or so for oil prices and that supply and demand to stabilize at sustained levels. The changes in supply and demand are already in the works to make that happen, even if you can't see it happening.

Remember, nobody saw the 2014/2015 meltdown coming. They won't see the recovery coming either. The biggest and best clue that the rebound is brewing is that crude prices are hammering out a clear, technical recovery.... a chart that's ultimately a reflection of traders' interpretation of the industry's fundamentals. Thing is, traders are usually collectively right, even if they don't know it at the time.

We'll continue to watch this story closely, for the obvious reasons.

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